India Joins Brazil to China in Tightening Liquidity: Economy

An Indian five hundred rupee note sits on a basket of marigold flowers at a store in the Dadar wholesale flower market in Mumbai. The rupee, which has also been hurt by India’s record current-account deficit, has sunk 8.2 percent against the dollar in 2013. Photographer: Dhiraj Singh/Bloomberg

July 16 (Bloomberg) -- India stepped up efforts to help the
rupee after its plunge to a record low, raising two interest
rates in a move that escalates a tightening in liquidity across
most of the biggest emerging markets. Bond yields and the rupee
surged.

The central bank announced the decision late yesterday
after Governor Duvvuri Subbarao earlier in the day canceled a
speech to meet the finance minister. The RBI raised two rates by
2 percentage points, and plans to drain 120 billion rupees ($2
billion) through open market sales of government bonds.

The rupee rose as much as 1.3 percent today, and the RBI’s
move left Russia as the only BRIC economy to not have reined in
funds in its financial system. Brazil has raised its benchmark
rates three times this year and a cash squeeze in China sent
interbank borrowing costs soaring to records last month.

“The importance of this move is that it signals that the
RBI is willing to act and make it much more costly to short the
rupee,” JPMorgan Chase & Co. analysts Jahangir Aziz and Sajjid
Chinoy said in a note. “These measures are only preconditions
to the RBI squeezing rupee liquidity to engineer much higher
short-term interest rates.”

The rupee, which has been hurt by a record current-account
deficit, has sunk 7.4 percent against the dollar in 2013. It
rose 0.9 percent to 59.3875 as of 11:55 a.m. in Mumbai after
touching an all-time low July 8. The yield on the 8.15 percent
bond maturing June 2022 rose 48 basis points to 8.15 percent.

Drain Cash

“These measures should not be read as a prelude to any
policy rate changes,” Finance Minister Palaniappan Chidambaram
told reporters in Jaipur today. “These measures in no way
affect our commitment to growth. Measures are taken to quell
excessive speculation and reduce volatility and stabilize the
rupee.”

The central bank increased the marginal standing facility
and the bank rate to 10.25 percent from 8.25 percent, it said in
a statement on its website. The monetary authority said it will
conduct open market sales of government bonds worth 120 billion
rupees on July 18, a step to drain cash from the economy.

“These moves will not only push up interest rates but also
lead to tightened liquidity conditions,” said Prasanna
Ananthasubramanian, an economist at ICICI Securities Primary
Dealership Ltd. in Mumbai. “It’s quite surprising that the
central bank has used these measures to support the rupee at a
time when the economy is in such a bad state.”

India’s economy expanded 5 percent in the fiscal year ended
March, the slowest since 2003, hurt by moderating investment,
easing domestic demand and subdued exports. Subbarao kept the
repurchase rate, the policy benchmark, at 7.25 percent in June
as the rupee’s drop stoked price pressures, snapping a run of
three cuts to fight the weakest growth in a decade.

Bank Rossii

Emerging markets from Brazil to Indonesia have raised
borrowing costs in 2013 to aid their currencies as the prospect
of reduced U.S. monetary stimulus curbs demand for emerging-market assets. Turkey’s central bank said yesterday it may raise
interest rates at its meeting next week.

In contrast, Bank Rossii opted to keep rates unchanged at
its July meeting while planning a new facility that expands
lenders’ access to cash even as inflation remains above the
central bank’s target range. Bank Rossii cut some long-term
lending rates at its previous three meetings.

The Reserve Bank of India said lenders borrowing under the
liquidity adjustment facility will be limited to 1 percent of
the net demand and time liabilities and that allocation to banks
will be in proportion to their bids.

Yesterday’s “tightening moves are aimed at making the
rupee liquidity dearer” and arresting the decline in the
currency, said Sonal Varma, an economist at Nomura Holdings Inc.
in Mumbai.

Wholesale Inflation

The central bank said it will “continue to closely monitor
the markets, the liquidity situation and the macroeconomic
developments and will take such other measures as may be
necessary, consistent with the growth-inflation dynamics and
macroeconomic stability.”

Elsewhere today, Australia’s central bank said its
currency’s decline and past interest-rate cuts meant its policy
setting was appropriate even as it maintained room for future
reductions, according to minutes of its July 2 meeting. New
Zealand reported consumer price gains slowed last quarter, and
the U.K., the European Union and the U.S. will also release
inflation reports.

The U.S. may also say industrial output rose in June, while
the ZEW Center for European Economic Research may report German
investor confidence climbed this month, according to Bloomberg
surveys.